OREANDA-NEWS. July 01, 2011. Change of organizational model of governance and activization of international expansion have become the main development areas thins year for TNK-BP – an oil company owned on a parity basis by Alfa-Access-Renova consortium (Russia) and British Petroleum (UK), reported the press-centre of TNK-BP.

Maxim Barskiy, Deputy Chairman of TNK-BP Management Board, gives an account of the new lines of company development in his interview.

- Changes in TNK-BP governance were announced this spring. What was the reason for such a decision?

- The organizational model we used to have in TNK-BP was based on equal representation of both shareholders in the company management. As you know, after the 2008 shareholders conflict, BP and AAR agreed to appoint an independent CEO, which signified a switch to a governance system with independent management vested with new tasks.

Historically many separate lines of operations have been formed in TNK-BP, such as Upstream, Downstream, gas, technology, procurement etc.

All of them worked well for as long as the maximum target for the company was to start up one or two fields a year. And TNK-BP succeeded in that goal – such major projects as Kamennoe, Verkhnechonskoe and Uvat were put on stream. However, now our management is facing considerably more difficult tasks.

The first challenge came with a reduction of economic efficiency of West Siberian production, where TNK-BP gets 70% of its oil from. The main drivers for the efficiency drop were inflation costs. The only controllable factor was production decline. Now we have managed to contain this decline to 5-6%, and the West Siberia 3 Year Efficiency Improvement Program envisages further slowdown of production decline rate down to 3%.

Another challenge is obviously Yamal development. TNK-BP has never done anything similar in its entire history. There is a multitude of projects to be implemented at the same time – gas, heavy oil, simultaneous development of complex fields, infrastructure construction, pipelines.

The third block of tasks is represented by international projects that are just as new for TNK-BP but have become a real business for us starting this year.

The old governance structure is now too confined to work efficiently in these three mega-areas. It does not cope and suffers from doubling of functions and excessive bureaucracy.

- What is the essence and benefits of the novelties?
- The point is in switching from asset management system (where a local general director makes all the decisions – where to drill, whom to contract, what service to set up) to a functional governance model. It is also called a matrix model.

This is the kind of a model that is in place in Еxxon (USA). It is all about clear segregation of functions: local general director acts as an administrator, simply supervising relations in his region of operation. While the three dominant units are Exploration, Production and Operations.
A simple example: we used to have geological model of the very Samotlor field in Technology, Tyumen Petroleum Research Center (TPRC) and in the office of Samotlorneftegaz General Director. It was unclear which of those models is the most up-to-date. Doubling of functions makes it difficult to understand who is responsible and for what.

Now we are moving to the next level – to an authority delegation matrix, matrix reporting system. The entire decision-making process has been cut down and carefully described, each step has been assigned to a specific person. Now it is clear who submits an issue, who has to endorse it and who makes the final decision. At that, we managed not only to considerably shorten the endorsement chain and speed up the decision-making process, but – what is more important – enhanced trust toward our managers authorized to make decisions, and increased their personal accountability.

The organizational structure is being completely reloaded.

- What impact will these changes have on your operation in financial terms?

- It is going to be a huge impact because the decision-making time will be cut down.
When I came to the position of Deputy Chairman of the Management Board, we hired Bain consulting company to assess efficiency of TNK-BP governance structure. The same consultant performed similar assessment for BP some time ago when Tony Hayward was CEO. It turned out that bureaucratic complications in TNK-BP were at the BP level although were are 3 times smaller in size. This means that were had to perform three times more operations than it was required for a decision to be made.

Underspend of circa USD1 billion of Capex in 2010 came as an example of incorrectly established processes.

- How are these changes perceived in the company? We have heard that some top managers left you.

- But just as many joined us. Staff turnover is a normal process in TNK-BP like in any other company, and it is by no means associated with governance reorganization.

Some people had their contracts expired, for instance – the contract of Executive Vice President Downstream D. Baudrand expires in the end of this year, and we are bringing up a succession for him already. The company is building up a succession system that would enable us efficiently chance managers and executive as may be appropriate.

By the way, ‘good old’ people are coming back to us to join new projects. We have initiated International Business, and Chris Einchcomb, an excellent professional who had already worked for TNK-BP, took charge of it, while David Szabo, who also worked for TNK-BP before, is going to lead the Field Development Division.

Oleg Mikhailov came to our West Siberia Division in Operations from Chevron, Evgeny Bulgakov leads South-East Area Division, and Thomas Quigley heads Yamal Project.

- Did TNK-BP shareholder German Khan, who is also Executive Director, express any will to leave the management team in connection with the governance changes?

- Today, the Company cannot afford losing such a valuable employee as German Borisovich. He has very extensive functions now: this is business support, including government relations, public relations, security, legal and strategy, as well as mergers and acquisitions. Except that we have split the latter one: I am responsible for the international part, and German – for Russian.

- Does the new governance structure require any amendment of the shareholders agreement?

- The first novelty was the merger of Technology Stream and SCM with Upstream. This was endorsed by the Board of Directors.

If we follow the logic of international business development, we have to change the composition of TNK-BP Management Board. It should turn from being a shareholders representation into an assembly of independent managers supervising main operation areas and reporting to CEO.

- TNK-BP has been very active in international acquisitions lately. Does this mean that in Russia the company is going to focus on the existing assets only?

- Our development in Russia is considerably restrained, although be spend most of the money here – as a matter of fact USD 4.5 billion of Russian Capex are incomparable to the projected international investments.

Unfortunately, inorganic growth opportunities available to us in Russia are very limited. We had some interest for Trebs & Titov project – but failed; tried to qualify to Arctic shelf development in cooperation with BP – and failed again. TNK-BP simply has nothing else left but to activate its international expansion.

Introduction of a new governance structure in TNK-BP will create conditions for most efficient work regardless of the asset location – no matter whether the field is in Russia or abroad. The most important thing is to concentrate the most precious of our resources – a pool of industry-best talented managers, set up clear tasks and create all conditions for their work.

- What production does TNK-BP expect to achieve abroad in the short and long term?

- As for the next three years, we already have Vietnam and Venezuela with sufficient development opportunities – both organic and inorganic.

In addition to that, we are considering the opportunities for Brazilian expansion subject to the Board of Directors support.

We reckon that our foreign projects may cover up to 10% of our production in five years time. No foreign production targets have been set for a longer term so far – TNK-BP 10 Year Strategy, which includes inter alia international expansion, will be reviewed by the shareholders in the nearest future.

- What is your personal view of TNK-BP potential?

- The company has a great potential in terms of the available resources. Given the existing reserves, and provided that the oil prices are stable, we shall be able to reach the production level of 1 billion barrels per annum.

And if we add international diversification to it, i.e. an increase of the share of business outside Russia to 30%, TNK-BP can actually reach the level of international majors in reasonably short time.

But in order to accomplish that, as I have already mentioned, it is necessary to build up internal governance processes to match the best international practice in the first place.

- Do shareholders variances have any impact on the company operation?

- No. Shareholders preserved their status quo. As managers, we have all opportunities, resources and utmost support of shareholders for efficient work and further development of the company.

- How are your personal relations with BP and AAR?

- Excellent.